FOREIGN EXCHANGE & CURRENCY
Exchange rates represent the linkage between one country and its partners in the global
economy. They affect the relative price of goods being traded (exports and imports), the valuation
of assets, and the yield on those assets. Since 1973 rates have been flexible. Foreign exchange
markets determine these rates based on trade flows, interest rate differentials, differing rates of
inflation, and speculation about future events. The VEDP advises that a minimal knowledge of
spot exchange rates and currency markets be acquired prior to signing any final international
SPOT EXCHANGE RATES
Spot exchange rates represent the value of one Spot Currency
currency in relation to another at a given time. Values Rates 1 USD$ =
fluctuate in response to many variables. Australian Dollar 1.31777 1.25141
Like the stock market, currency spot values are
Argentine Peso 3.08440 3.16575
determined by supply and demand, which are
influenced by political and monetary policy, Brazilian Real 2.15260 2.02925
expectations, and imports and exports. Countries with *British Pound .53167 .50424
high inflation rates (which tend to yield lower Chilean Peso 554.890 523.250
investment) and countries with large trade deficits
(which reflect high imports and thus high supplies of Czech Koruna 21.97599 20.45700
foreign currency) should eventually experience Canadian Dollar 1.12609 1.05965
currency depreciation. (U.S. Federal Reserve) Chinese Yuan
US$ peg partially 7.98550 7.59945
removed July 21, 2005
Example: Per the chart on the right it “cost” 2.15260
Reals to buy one USD$ on August 21, 2006. One year *European Euro .78006 .74155
later it cost 2.02925 Reals to buy one USD$. Thus the Indian Rupee 46.46500 41.08169
Dollar is depreciating and the Real is appreciating vis-à- Hong Kong Dollar 7.77521 7.81603
vis the Dollar. The U.S. Dollar is depreciating against all
currencies listed to the right except the Argentine Peso, Japanese Yen 115.838 114.704
Hong Kong Dollar, Mexican Peso, Singapore Dollar, Jordanian Dinar .71360 .71346
and the South African Rand. Mexican Peso 10.83340 11.09678
Polish Zloty 3.05623 2.85210
FOREX Demand: From a U.S. perspective, demand for
foreign currency (FOREX) is primarily influenced by Russian Ruble 26.74181 25.77526
demand for imports or U.S. investment abroad. Saudi Riyal 3.75130 3.75121
Singapore Dollar 1.57450 1.52747
Example: A purchase of Brazilian goods or U.S.
investment in Brazil. The U.S. buyer sells US$ to bank S. African Rand 6.94000 7.37744
and buys Reals to pay Brazilian seller for imports. This S. Korean Won 973.805 945.001
creates a demand for Reals. The Dollars are converted Swiss Franc 1.23379 1.20683
at the bank to buy Reals in order to make payment for
imports or investment in Brazil. New Turkish Lira 1.46100 1.35444
Over time, this leads to Dollar depreciation. U.A.E. Dirham 3.67400 3.67320
FOREIGN EXCHANGE & CURRENCY
US$ Demand: From a U.S. perspective, supply of foreign exchange is primarily influenced by
supply of exports and foreign investment in the U.S. This creates demand for Dollars at the bank
because payment or investment is made in U.S. Dollars.
Example: A sale of U.S. goods to Brazil or Brazilian investment in the U.S. The Brazilian buyer
sells Reals to bank and buys US$ to pay U.S. seller for exports. This creates a supply of foreign
currency at the bank because the Real is converted to make Dollar payments or investments.
Over time, this leads to Dollar appreciation.
Note: The British Pound and the Euro * are reciprocals. Exchange rates can be expressed as
the foreign price of a domestic currency or its reciprocal- the domestic price of foreign currency.
(Source for chart on preceding page: www.oanda.com)
HOW DO EXCHANGE RATES AFFECT IMPORTS & EXPORTS?
As exchange rates fluctuate, the domestic prices of foreign goods will often be affected.
If the US$ depreciates vis-à-vis a foreign currency, U.S. exports become cheaper and tend to
rise, while U.S. imports theoretically become more expensive and tend to fall.
Example: The stronger Brazilian Real (it now takes less Real to buy a U.S. Dollar) or weaker
U.S. Dollar (a Dollar now buys fewer Real). This relationship makes Brazil’s goods exported to
the U.S. more expensive to buy with U.S. Dollars. At the same time, it makes goods that the U.S
exports to Brazil more affordable to buy with Real. We would expect that this change would lead
to an increase in the flow of goods from the U.S. to Brazil
Conversely, if the US$ appreciates vis-à-vis a foreign currency, U.S. exports become more
expensive and tend to fall, while U.S imports become cheaper and tend to rise.
Example: A weaker Mexican Peso (it now takes more Pesos to buy a U.S. Dollar) or stronger
Dollar (a Dollar now buys more Yen); this relationship makes Mexico’s goods exported to the
U.S. less expensive to buy with U.S. Dollars. At the same time, it makes goods that the U.S.
exports to Mexico more expensive to buy with Pesos. We would expect that this change will
lead to an increase in the flow of goods from Mexico to the U.S.
The exchange rate process is complicated for money brokers, but it doesn’t have to be for the
average exporter. A brief synopsis of how exchange rates are used by an exporter is printed
below. This synopsis was taken from The Basic Guide to Exporting, a publication of the U.S.
Department of Commerce in Cooperation with Unz & Co., Inc.
“A buyer and a seller who are in different countries rarely use the same currency. Payment is
usually made in either the buyer's or the seller's currency or in a third mutually agreed-upon
FOREIGN EXCHANGE & CURRENCY
currency. One of the risks associated with foreign trade is the uncertainty of the future exchange
rates. The relative value between the two currencies could change between the time the deal is
concluded and the time payment is received. If the exporter is not properly protected, a
devaluation or depreciation of the foreign currency could cause the exporter to lose money.”
Example: If the buyer has agreed to pay 1,000,000 Yen for a shipment and the Yen is valued at
100 Yen per Dollar, the seller would expect to receive US$10,000. If the Yen later decreased in
value to be worth 99 Yen per Dollar, payment under the new rate would be only US$9,900, a
loss of US$100 for the seller. On the other hand, if the Yen increases in value to 101 per Dollar
the exporter would get $10,100 an extra $100 in profits.
Most exporters are not interested in speculating on foreign exchange fluctuations and prefer to
avoid risks. One of the simplest ways for a U.S. exporter to avoid this type of risk is to quote
prices and require payment in U.S. Dollars, thus placing the burden of exchanging currencies
and associated risks on the buyer. Exporters should also be aware if there are problems with
currency convertibility. Not all currencies are freely or quickly converted into US$. Fortunately,
the US$ is widely accepted as a global trading currency and U.S. firms can often secure
payment in Dollars.
If the buyer asks to make payment in a foreign currency, the exporter should consult an
international banker before negotiating the sales contract. Banks can offer advice on the foreign
exchange risks that exist with a particular currency. Some can also help hedge against such a
risk, by agreeing to purchase the foreign currency at a fixed price in Dollars, regardless of the
currencies value at the time the customer pays. Banks normally charge a fee or discount the
transaction for this service. If this mechanism is used, the bank's fee should be included in the
MITIGATING FOREIGN EXCHANGE RISK
While getting paid in United States Dollars is preferred, it is not always possible. In the example
above, risk arises in terms of potential losses to the buyer or seller due to fluctuations in the
value of the Yen. These risks can be minimized through “hedging”.
• Hedging minimizes the risk for both the buyer and the seller.
• Without hedging, the U.S. exporter absorbs the risk if the foreign currency depreciates and
the buyer absorbs risk if it appreciates.
• Hedging protects against major downside losses by securing future currency values.
• Hedging is needed for all sales without advance or U.S. Dollar payments.
• Hedging is offered by banks for a fee which can be added to the final contract.
Hedging Example: U.S. exporter sells goods valued at $100 to be paid for with Yen. In
currency terms this sale equals Sell Yen-Buy Dollar. Today’s rate is 100 Yen per U.S. Dollar,
but the terms call for payment one month from now and the Yen is projected to appreciate vis-à-
vis the Dollar to a rate of 99 Yen per U.S. Dollar. The seller needs to be paid $10,000, not
$9,900. In order to ensure payment of $10,000, a counter “hedge” would be placed to offset this
risk of loss.
FOREIGN EXCHANGE & CURRENCY
In summary, exchange rates, if not carefully considered, can dramatically change the
anticipated outcome of a foreign contract. When dealing with large contracts, exporters should
always consider currency exchange risk and use one of the above methods to mitigate any
losses due to currency fluctuations. While this document does not present all the various ways
to cover currency risk, some key types of hedging are listed on the following chart.
(Source: The Export Institute)
FOREIGN EXCHANGE & CURRENCY
VEDP TRADE EVENTS
For a complete listing of VEDP’s international trade events, please visit the “Events” tab on our
VEDP CONTACT INFORMATION
Virginia Economic Development Partnership
Division of International Trade
P.O. Box 798
901 East Byrd Street
Richmond, Virginia 23218-0798
Tel: (804) 545-5764
Fax: (804) 545-5751
• Exchange Rates: http://www.x-rates.com
• The Currency Site: http://www.oanda.com/convert/classic
• Your Bank
International Banking Contacts:
Dewey M. Chester, Jr. BB&T, International Services Division
www.bbandt.com/international/ 804-787-1315 firstname.lastname@example.org
Knox Hubard Bank of America
www.BankofAmerica.com (804) 788-2120 email@example.com
Marsha Sompayrac SunTrust Bank
www.SunTrust.com (804) 782-5558 firstname.lastname@example.org
Humpage, Owen F., <www.clevelandfed.org>
Federal Reserve Bank of Cleveland. January 1, 1998 22 Aug.2003
India Infoline Ltd., “Features: Understanding U.S. Markets: Foreign Exchange.” October 14,
2000. 22 Aug. 2003 <http://www.indiainfoline.com/>
Jagoe, John R. Export Sales & Marketing Manual 2001. 14th Ed. Export Institute. 2001. 15th
Edition Available at: <http://www.exportinstitute.com>
United States Department of Commerce and Unz & Co., Inc., A Basic Guide to
Exporting™ 1998. 26 July, 2004 <http://www.unzco.com/basicguide/toc.html>
Last Revised: August 2007
*Information provided by VEDP Fast Facts is intended as advice and guidance only. The information is in no way exhaustive and the VEDP is not a
licensed broker, banker, shipper or customs agency. VEDP shall not be liable for any damages or costs of any type arising out of, or in any way
connected with the use of, these Fast Facts.